Friday, October 19, 2018 9:32:17 AM- Nigerian Stock Exchange.

  Nigeria stands tall despite Moody’s sovereign downgrade

      by Lukman Otunuga

Nov 27 (Lagos) - Investor confidence over the recovery of Nigeria’s economy received a solid boost in November, after the nation’s gross domestic product expanded 1.4% during the third quarter of 2017. Economic growth was powered by a rise in crude oil production, while an increase in agricultural output also played a leading role. 

With the largest economy in Africa showcasing its reliance on the global stage once again, markets’ players across the world are likely to remain optimistic over the longer-term outlook.  When considering how the signs of an economic recovery can already be seen in GDP, improving macro fundamentals and easing inflationary pressures, Nigeria has done quite well for itself this year. 

As 2017 slowly comes to an end, much attention will be directed towards inflation figures and Nigeria’s central bank, for further clues on when interest rates will be cut in 2018.

The positive sentiment towards the Nigerian economy was slightly impacted after Moody’s downgraded the nation’s sovereign issuer rating to B2, with a stable outlook. According to the ratings agency, “Nigeria’s efforts to increase non-oil revenue have so far proven largely unsuccessful” with “key structural weakness persisting”. 

Although Nigeria has worked hard to place itself in a stable position where it could shield itself from some external risks, more work is needed as fiscal strength remains weak. The mantra remains that the successful implementation of structural reforms is one of the key ingredients for Nigeria to shine on the world stage. 

Taking a deeper look into the fundamentals, annual inflation eased for the ninth straight month at 15.91% in October which pointed to further signs of price stability. The Purchasing Manager Index also remained in expansionary territory at 55.00, amid growing demand for goods and services. 

With consumer prices stabilizing and economic conditions improving, the central bank of Nigeria is on course to cutting benchmark interest rates in an effort to support growth further.
There have been numerous discussions about the Senate approval of a massive $5.5 billion external loan request by President Muhamad Buhari. 

With the recent Moody’s downgrade adding to the mix, borrowing could become more expensive for the Nigerian government. It is widely known that $3 billion of the loan will be from international capital markets, while $2.5 billion through a Eurobond or Diaspora. 

While the intention of the government is to use the loan to finance the deficit in the 2017 budget, a portion will be used to fund capital projects such as the Mambilla Hydro Project and the construction of a second runway at the International Airport in Abuja. With investors seeing that the money will be used for infrastructure developments, this is likely to support positive sentiment.

Looking ahead, markets will be paying very close attention to Nigeria’s 2018 budget; named as one of “consolidation”. With the mammoth N8.6 trillion budget expected to consolidate the positive gains of the 2017 budget and help Nigeria’s economic growth recovery strategy to materialize, 2018 onwards could be very interesting.  

The government is also expected to reinforce infrastructure and bolster investment in agriculture which could result in Nigeria attaining food security while reducing imports.  With economic growth projected to reach 3.5% and inflation stabilizing around 12.4%, the budget, if implemented correctly, has the ability to grant Nigeria economic stability. 

An interesting part of 2018’s budget which is likely to boost investor sentiment, was the noticeable fall in dependence on oil revenues. With oil revenues of N2.442 trillion and non-oil revenues of N4.165, global investors can see Nigeria’s efforts to break away from the chains of oil reliance.

Speaking of Oil, it was interesting how the government based 2018 budget on crude oil benchmark prices of $45 per barrel, with oil production estimated at 2.3 million barrels a day. WTI Crude is currently trading around $58, amid investor expectations of major crude exporters extending production cuts beyond March 2018. 

While an extension of the OPEC deal to limit production could send prices higher short-term, the rising US output is likely to limit upside gains. With Oil prices still vulnerable to downside risks amid oversupply concerns, this will impact oil export-dependent nations, with Nigeria falling into this category. If OPEC requests the currently exemptNigeria, to join the production cut deal, this could impact their budget.

Focusing on foreign exchange, the Naira depreciated to N360.65 per dollar in the Investor and Exporter (I&E) Foreign exchange window on Wednesday. With the dollar vulnerable to losses amid uncertainty over the future path of US interest rates beyond 2018, Nigeria’s Naira may appreciate against the Dollar.

I believe the recession that gripped the Nigerian economy was a serious wakeup call and marked a critical turning point for the nation to diversify away from oil, while heavily focusing on other sustainable sources of growth. 

This has been a tough year for the nation but with economic growth recovering and inflation stabilizing, Nigeria can proudly stride across the 2017 finish line.

reporting for on Monday, Nov 27 2017 from Lagos, Nigeria

Source - Written by Lukman Otunuga, Research Analyst at FXTM

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